KEY PERSON INSURANCE - Guidance Financial Services

KEY PERSON INSURANCE
A SUCCINCT GUIDE FOR BUSINESS OWNERS
PAUL BENSON
B. BUS., CFP, SSA
Bespoke. Ethical. Investments.
KEY PERSON INSURANCE
INTRODUCTION:
THE IMPORTANCE OF
BUSINESS INSURANCE
“Take away my people, but leave my factories, and
soon grass will grow on the factory floors. Take away my
factories, but leave my people, and soon we will have a
new and better factory”
// Andrew Carnegie
If that was true in the late 19th century, it is even more so
now. As our workforce becomes more highly skilled, and
the services sector grows, businesses are about people.
Yet strangely, few businesses insure their people, whilst
putting great emphasis on protecting the premises from
relatively rare incidents such as fire and theft.
According to OnePath, a business with two male
proprietors, aged 40 and 43, has a 51% probability of
making a key person insurance claim for either Life,
Trauma, or TPD. Add a third partner of a similar age, and
the likelihood of one of the three making a claim raises to
65%.
Key person insurance pays.
For many small to medium businesses, the key people
are the owners. They know the clients, know the products
and services, and very often provide financial support for
the business through personal guarantees or mortgages
over their family home. Were one of the owners to pass
away for instance, in many cases the business would be
unviable, leaving financial wreckage for family, staff, and
perhaps business partners.
TYPES OF
BUSINESS INSURANCE
The four primary types of personal business
insurance are:
1.
2.
3.
4.
Business Expense cover is typically an adjunct to Income
Protection. Claim conditions are the same, however rather
than providing income for the business owner to live off,
Business Expense cover reimburses for the running costs
associated with the business such as rent, non-income
producing staff wages, utilities.
Key Person Revenue
Key Person Capital
Income Protection
Business Expense Cover
Income Protection is perhaps the best understood in the
business community. This cover replaces up to 75% of
income where a person is unable to work due to illness
or injury. The person’s income must cease during the
period of incapacity. As such, this cover is applicable
to someone who is the sole income generator for
the business.
A package of Income Protection and Business Expense
cover is highly customisable to fit an individual business
owner’s needs.
The focus of this booklet however is Key Person cover.
Key Person cover can be taken in two forms – Revenue
cover and Capital cover. These will be covered in detail in
the following pages.
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KEY PERSON INSURANCE
HOW BUSINESS
INSURANCE HELPS
Scenario 1
Scenario 2
Tim runs a business importing caulking products for the
construction industry. Tim has an office admin/bookkeeper, and a delivery person. However, essentially Tim
is the business. He sources the products from suppliers
in Europe, and knows the local buyers.
Jane and Lisa run a successful PR and events management
business. They have two team members who support them,
however all new business is gained through the two owners
contacts. Turnover is approximately $1 million per year.
The business has a debt of $400,000 for working capital
and to cover the cost of a warehouse fit-out 18 months
ago. Both Tim and his wife have provided personal
guarantees for the debt, and the bank has taken a
second mortgage on their home as security.
What happens if Tim was to die, or become totally and
permanently disabled?
The business would fold. The bank would call in the
outstanding debt. Recovering outstanding debtors
could be difficult, whilst creditors will demand payment.
The business will be unsellable. Tim’s family may lose
their home.
What happens if either were to suffer a serious medical
condition such as cancer, which took them out of the
business for an extended period? Would the business
need to hire an additional person to complete the jobs
currently under contract? Would revenue halve? Could the
current staff be maintained? Would the business survive?
A possible solution would be for the business to hold
Key Person Revenue cover. In the event of a serious
medical condition, the business would receive a lump
sum insurance payout, which could cover any additional
costs, replace lost income, and ensure the business
is able to survive.
A possible solution would have been for Tim to have
Key Person Capital cover sufficient to clear the debt on
his death or permanent disablement. This would protect
the family home. The cover might also be extended to
provide funds for the orderly wind-up of the business,
and to ensure Tim’s family receives some value for all
the goodwill he has built up over the years.
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KEY PERSON INSURANCE
KEY PERSON
REVENUE COVER
Most businesses take out insurance cover for assets
that do not make them profits – their plant, equipment,
vehicles and buildings. But it is the human asset that,
through initiative, drive, skill, specialist knowledge and
ingenuity can turn the capital and assets into profit.
In the event the insured key person suffers a serious
medical condition such as the diagnosis of cancer,
becomes totally and permanently disabled, or dies, Key
Person Revenue cover can provide the business with
funds for:
Losing a key person can cause revenues to go down,
and costs to increase.
1. The recruiting costs incurred by a business to locate,
attract and recruit a suitable replacement,
Key Person Revenue cover is intended to protect a
business from the negative effects on trading caused by
the death or disablement of a “key person”.
2. The cost of training a replacement, and
A Key Person is someone within the business to whom
profits can be directly attributed. In the SME space, this
is most often the business owner, but may also extend
to key staff.
3. Cover the loss of profit suffered by the business as
a consequence of being without the key person.
Key Person Revenue cover can be the key to a business
surviving through a very challenging period.
KEY PERSON
CAPITAL COVER
Key Person Capital cover is intended to provide the
business with sufficient cash reserve in its asset base
by repaying or reducing debts owned by the business
owner upon their death, disability, or critical illness.
It aims to ensure that the business can repay debts,
easing the financial burden of the business at a crucial
point in time. This gives the remaining business owners
some breathing space to stabilise and maintain the
capital value of the business. It also protects the
business owner’s family, since very often the business
owner will have provided personal guarantees for
the business.
In addition to clearing debts, Key Person Capital cover
can also replace Goodwill. It may be that the business
owner’s financial plans are based upon an exit value for
the business. With the business owner lost to the business,
that value is likely to have diminished, jeopardising the
financial position of the business owners family and
perhaps the other business owners.
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KEY PERSON INSURANCE
WHAT NEXT?
Now that you can see why Key Person insurance is relevant to you and your
business, it’s time to act.
Phone 03 9870 6544 to schedule an appointment. We can come to you.
Once we’ve gained an understanding of your business and financial position
we will prepare a proposal for your consideration. To this point all costs have
been absorbed by Guidance. With your agreement, we then work with you to
implement a solution that fits within your budget constraints and provides your
business with a robust financial safety net.
For you, that means peace of mind.
We welcome your feedback and look forward to working with you over the
coming years.
Paul Benson B.Bus., SSA
Financial Planner - Principal
SMSF Specialist Adviser TM
This information is of a general nature only and has been prepared without taking into account your particular financial needs,
circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed.
You should obtain professional advice before acting on the information contained in this publication. Guidance Financial
Services is and authorised representative of Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, a wholly owned but
nonguaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124.
Email: [email protected]
Fax: 03 9337 0310
Mail: 11/207 Buckley St, Essendon VIC 3040
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Bespoke. Ethical. Investments.
Contact Guidance today
guidancefs.com.au
[email protected]
11/207 Buckley St, Essendon VIC 3040
03 9870 6544